Monday, August 31, 2009

Local rock and roll legend Red Robinson was profiled in the Vancouver Sun this past week. And it wasn't his entertainment credentials or stories that were of interest. Instead, it was his views about Real Estate that caught our eye.

After 44 years on the North Shore, Robinson and his wife Carole, decided it was time to downsize. They sold their 4,000-square-foot home in Deep Cove and, rather than buy a new place, they opted to rent a 1,560-square-foot condo in Coal Harbour.

Why rent?

"We sold our place for over a million - I'm not going to go into the exact figure, but well over a million. And . . . it's tax-free! Now wouldn't I invest that, while I'm waiting to see whether the prices are going to go up or down?"

Sound advice.

Robinson, you see, isn't being sucked into all the hype by the BC Real Estate Association, Canadian Real Estate Association, et al that 'now' is the time to buy.

And he is following the exact advice that we 'whisper' to every soul who will listen.

Our market is at the absolute pinnacle of it's bubble right now. When interest rates start going up (and they WILL go up), our market is going to crash in stupendous fashion.

So Robinson wonders, why buy now?

And with good reason. Property values are way out of balance.

Consider this this little gem.

Here is a house located on the west side of Vancouver, in Marpole. It is located at 541 W. 64th Ave (hattip to 'bestplaceonmeth' at RET).

What a dump! How much is this piece of crap on the market for?

$1.5 million dollars!

I'm not making this up. Here is the MLS listing. I'm going to also post an image of the listing for future reference (click on the image to enlarge)

How whacked is that?

Now let's compare that to a worldwide resort destination like Hawaii.

Two weeks ago, in Molokai, the Hawaiian estate of software mogul John David McAfee (of McAfee Virus Protection fame) was auctioned off.

The estate is 5.34 acres of oceanfront property, zone agricultural and equestrian, contains bridal and hiking trails throughout, and is a short distance to Papohaku Beach which is one of the longest white sand beaches in Hawaii.

The 4 bedroom home has a mastersuite that opens onto a large covered deck that faces the ocean, a huge walk in closet, a large jacuzzi in the master bath surrounded by black granite, a glass block shower, his and her sinks and an ocean view.

Bedrooms 2 and 3 have 18x20 foot walk-in closets and full bathrooms. Bedroom 2 has a whirlpool bathtub and a seperate shower. Bedroom 3 has a loft area. Both bedrooms open up to the large covered deck which faces the ocean. Bedroom 4 is slightly smaller with a full bathroom and its own deck.

Here are a couple of pictures. As always, click on the image to enlarge.

You guessed it! $1.5 million dollars (you can see a reference to the auction result on page 2 of this New York Times story).

Now let me ask you a question.

If you had $1.5 million dollars to spend on a house, would you really buy that piece of shite in Marpole instead of something like this Molokai estate?

The answer is not only obvious, but it seems profoundly laughable to even be asking it.

The people who are buying real estate in Vancouver this year, even those who are 'only' paying half a million dollars for a house, will very shortly be wondering how they could have been so shortsighted to consider... and then act on... their decision to buy in this market.

They will regret not doing exactly what Red Robinson is doing; waiting it out.

The popping of this bubble is going to be nothing short of stunningly spectacular.

Saturday, August 29, 2009

I'm sure you have seen them in bookstores, the Rich Dad Poor Dad series. I have never picked one up to read.

The 'dad' in the series is Robert Kiyosaki. I have always looked at him, and authors like him, as being a marketing wiz, and not a lot more. I am told his books are mostly a good read for those inexperienced in business. But I always find such tome's to contain one key lesson for wealth building: Want to get rich? Write a book.

Of all his books, even before the crisis, Kiyosaki called it the most important book he’s written. Earlier this week he wrote the following article, "Preparing for the Worst".

I don't think he's far off the mark and I offer it up for your consideration today.

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Preparing for the Worst

by Robert KiyosakiMonday, August 24, 2009

"Is the crisis over?" is a question I am often asked. "Is the economy coming back?"

My reply is, "I don't think so. I would prepare for the worst."

Like most people, I wish for a better future for all of us. Life is better when people are working, happy, and spending money.

The stock market has been going up since March 9, 2009. Talk of "green shoots" fill the air. Yet, in spite of the more positive news, I continue to recommend that people prepare for the worst. The following are some of my reasons:

1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.

Do I have any proof that the market is being manipulated? No. I just smell a rat, or a pack of rats. I believe greed, self-interest, arrogance, and fear control the financial markets. I suspect those in charge will do anything to keep us all from panicking... and I don't blame them. A global panic would be ugly and dangerous.

2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.

Every time I hear a politician mention the word stimulus, my mind flashes back to high school biology class, when I touched battery wires to a dead frog to make it twitch. Today, you and I are the dead frogs. Pretty soon the dead frog will be fried frog.

In the 1980s, our government's hot money stimulus was measured only in the millions of dollars. By the 1990s, the government had to ramp the stimulus voltage into the billions in order to get the frog to twitch. Today the frog has jumper cables with trillions in high-voltage hot money pouring through the lines.

While most us feel better when we have more high-voltage money in our hands, none of us feel good about higher taxes, increasing national debt, and rising inflation for the long term. Another old saying goes, "Sometimes the cure is worse than the disease." I say the government stimulus cure is killing us frogs.

3. Old frogs don't hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years -- their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.

The stimulus plans seemed to work. But when a person turns 60, their spending habits change dramatically. They stop consuming and start conserving like a bear preparing for winter. The economy of the Western world is heading into winter. Hot wires and hot money will not get old frogs to hop. Old frogs will simply join the bears and stick that money in the bank as they prepare for the long, hard winter known as old age. The businesses that will do well in a winter economy are drug companies, hospitals, wheelchair manufacturers, and mortuaries.

4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it's my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare... Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.

5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire. One reason so many people my age are worried, not only about Social Security and Medicare, is because they're concerned about getting their money out of the stock market before the other old frogs decide to drain the swamp.

The facts are that the 401(k) plan has a trigger that requires old frogs to begin withdrawing their money at a certain age. In other words, as baby boomers grow older, more and more will be required, by law, to begin withdrawing their money from the market. You do not have to be a rocket scientist to know that it is hard for a market to keep going up when more and more people are getting out.

The reason the 401(k) has this law related to mandatory withdrawals is because the Federal government wants to collect the taxes that they deferred when the worker's money went into the plan. In other words, the taxman wants their pound of flesh. Since they allowed the worker to invest without paying taxes, the government wants their tax dollars when the employee retires. That is why the laws require older workers to sell their shares -- and pay their pound of flesh.

Demographics show that we are entering a battle between young and old. I call it the "Age War." The young want to hang onto their money to grow their families, businesses, and wealth. The old want the tax and investment dollars of the young to sustain their old age.

This war is not coming...it is upon us now. This is one of many reasons why I remain cautious and say, "The worst is yet to come."

Friday, August 28, 2009

This past week a tremendous amount of attention was paid to Dan Amoss and his prediction that the Bank of Montreal was going to be forced to cut it's dividend, a development he claimed could trigger the bank's stock to fall dramatically and lead to a possible 'crash' of the bank.

Amoss is a member of Agora Financial of Baltimore Maryland and is managing editor of one of their publications, the Strategic Short Report (SSR). The SSR is a pricy internet-based newsletter that provides 'tips' to subscribers on stocks that may be worth shorting.

Last week, Amoss had the Bank of Montreal in his crosshairs.

Teaser ad's for the newsletter on the internet implied that BMO's dividend cut might come as soon as this week's August earnings release, which is after the August options expiration. Investors could, if they believed Amoss' 'scoop', make several market plays to take advantage of the situation.

Two typical strategies (as I understand it) would be to buy an in-the-money put and hope for a reasonably conservative return. Even if the stock stayed stable, it would give you some chance to preserve your investment.

Or you could buy out-of-the-money puts for a chance of greater leverage to a falling share price. This was probably the most aggressive move. Buying out-of-the-money September puts (you could get a September $40 put for about 70 cents) would have you in a position that, if the dire prediction of a dividend cut came through, or if the shares collapsed by half in short order, you’d be more than tripling your money. If the shares fell to $23, a $40 put is worth $17 at expiration. That means you would see 70 cents to $17 as a return... a huge amount.

Of course, the reason it’s huge is that most people think it’s unlikely — just like any other longshot.

In hyping the newsletter, Amoss proclaimed that one of Canada's major banks was about to crash. Another Agora site, PennySleuth promoted the story with the headline "How to Play the Canadian Banking Crisis for a Quick Double" on August 12th.

Although Amoss didn't reveal the name of the bank in question (you had to subscribe to his pricy newsletter to obtain those details), the assertion caught the internet by storm. Stockgumshoe.com picked up the story and rumours started flashing across social networking sites. Based on the clues provided, it wasn't hard to speculate which of the 5 major Canadian banks Amoss was refering to.

By Friday August 21st the rumour reached us here and an initial post was made. By Sunday even Garth Turner made a post about it.

It became an honest-to-goodness internet sensation.

The result?

In the options market on Monday, about 48,000 contracts changed hands, 34 times the usual daily volume, according to option analytics firm Trade Alert. The turnover included 3,405 calls. Volume in the stock's puts outnumbered calls by a ratio of more than 13-to-1. The stock fell 3% and the story caught the attention of the mainstream press. Organizations such as Bloomberg, Reuters, and several Canadian newspapers began making enquires.

By opening bell on Tuesday morning the story washed-out as a non-event. BMO maintained it's dividend, announced it had increased profits; and news organizations found Amoss unavailable for comment.

Curiously, on Wednesday, the Financial Post published a story in which a large number of analysts took issue with Bank of Montreal's earnings reports. Since Amoss had raised questions about the bookkeeping used by BMO, we were genuinely surprised not to hear more from him.

A reader writes of Dan Amoss’ much-ballyhooed put that we released on Monday. “Your hype has to be controlled. One would have thought that based on your information Bank of Montreal would have announced results much worse than estimated. Instead, it beat estimates. This just makes me mad, and I lost a lot of bucks on this trade, and I am not willing to risk waiting around for the next quarterly report. Who would, with the relatively positive news that BMO released yesterday? Just disgusting! Shame on you.”

The 5: The cat is out of the bag on Bank of Montreal. We tried to keep a lid on the story for paying subscribers, but details ended up being spread all over the Internet, including a blog at The Globe & Mail, Stock Gumshoe and short bits reported in Bloomberg and Reuters.

But if you’re waiting for us to issue a “mea culpa” and hang Dan out to dry -- that's not going to happen. We think his analysis is first-class, and the nature of this speculation still gives investors time to profit. It's only over if you sold in a panic.

Of course, there's always a chance Dan’s pick is either too early or wrong. That's the nature of speculation. If you can’t stomach trading swings and a potential loss, buy Treasury bonds. (Heh, even that might not pan out.) There are quite a few people who appreciate Dan's efforts, yours truly included.

If, on the other hand, you're actually interested in a thorough and clearheaded exploration of BMO’s latest earnings report -- including questions Dan has regarding loan loss provisions and "tier one capital" -- see your latest Strategic Short Report alert.

By the way, Dan's on a plane right now. But by e-mail this morning, he said he's got his eye on anther bank -- this one a smaller American bank. He'll be sending his recommended put soon…from the frying pan into the fire.

It seems like such a tremendous opportunity wasted by Amoss and Agora.

Here you had a ton of attention focused on the issue with the mainstream press eagarly awaiting comment. This is the type of situation tailor-made to create a market oracle.

It's how people like Peter Schiff established themselves.

In the face of doubt, Amoss could have been profiled in the mainstream press, detailed his concerns, outlined his case, and stuck to his convictions about the state of the Bank of Montreal.

Would he have been ridiculed and put down? Without a doubt. Would it have been information passed on to non-subscribers of the newsletter... absolutely.

But down the road, if the assertions proved correct, Amoss and Agora would have been catapulted to cult status in the same manner as Peter Schiff and Euro Pacific Captial.

Instead they opted to shun the media and shill a new bank play as part of an effort to hock more sales of their newsletter.

Thursday, August 27, 2009

I have some comments to make about Amoss and the Bank of Montreal, but I am going to sit on if for a bit.

It's easy to write Amoss off but as we saw yesterday, with the update I added from the Financial Post, many analysts still have problems with BMO. And where there is smoke, there just might be some fire.

In the meantime, let's turn our attention back to Real Estate in Vancouver.

Could the market really recover this quickly from the traumatic trifecta of a record real estate bubble, leviathan levels of debt, and a global credit collapse?

We don’t see it as remotely possible, but yet... there for everyone to see... are countless happy headlines and breathless exhortations that the worst is behind us.

July has been a record breaking month for sales. Here is a chart of the Teranet Historic Index Values for Vancouver and we are on an uptick again. And this is before the July stats have been factored in.

And the frenzy is having it's effect.

A work colleague has, just this week, committed to a home purchase in Surrey. With a mortgage at over a half million dollars, it is a significant move.

When asked if he could make things work if interest rates bump up to 6 or 8%, the responsive is chilling. "Sometimes you just have to take a risk."

(Merp!)

Another work colleague has constructed a dream home costing in excess of $1 million, is plunging headlong into a new business that will require another 1/3 of a million and halting concedes it's all highly leveraged.

When asked about it, he tells me that "you can't always just sit back".

(Merp!)

Meanwhile acquaintances in the neighbourhood are struggling with only one income as the husband languishes unemployed since January (construction industry). They sought relief in March by tapping out the equity in their family home. Having exhausted that funding, they have just drawn on the remaining equity in a second home they own as an investment property. Who says use of the Home ATM is dead?

Have the lessons of the last year been completely lost on these people?

We are nearing the day of reckoning here on the wet coast and the signs are everywhere.

The BC goverment, who have been in denial about the severity and state of the world economy, are being forced to pull their heads out of the clouds. Back in May people predicted the government would be in serious financial trouble. The provincial goverment steadfastly denied there was a problem looming.

Now?

The B.C. Liberals warn of impending cuts to government grants, possible layoffs and public-sector wage freezes. The cash-strapped politicians shriek that "the fiscal cupboard is bare and hangs on a wall of deficit spending." The Finance Minister declares that the "downturn is far beyond what we previously had anticipated."

In the United States, the White House warned this week that the economy is in worse shape than expected. Strategist's advise that we shouldn't count on consumers to fuel any economic rebound.

And the US national debt, the sale of whose treasuries controls the setting of mortgage interest rates, will nearly double over the next 10 years - virtually guaranteeing a dramatic increase in interest rates as the US struggles to fund that debt.

Coming back to Vancouver, we seem oblivious to it all.

We are clearly the most bubbly city in North America right now and Vancouverites seem to be in a total state of delusion as they dive headlong into mountains of debt anchored by real estate.

All it will take is a catalyst to trigger catastrophe.

Maybe that's why the Bank of Montreal rumours we covered in detail set off such an avalanche of hits to this site (over 15,000 in 24 hours).

Agora Financial didn't have much to say about the issue today other than the following comment:

Dan Amoss' short of a major bank met with some delayed gratification yesterday. At the conference call, Bank of Montreal not only didn't reduce their dividend, they dropped their loan loss provisions.

That’s good news for day traders, but “a recipe for disaster” for the long haul, Dan tells us. “I still expect a big surge in provision expenses, likely as soon as the quarter ending in October. If you don't believe that the Canadian and U.S. economies are going to come roaring back, which I don't, this is still an attractive short sale.” We think this story is in the early chapters.

Still waiting to see if Amoss will come out with a more detailed statement.

The issue caught our eye, we highlighted it and attempted to fill in the details.

Judging by the exponential increase in hits to this site the last couple of days... a great many of you were clearly interested as well.

Soon the mainstream media (Bloomberg, the Globe & Mail newspaper and the Toronto Star newspaper) picked up on it as well.

We expect Dan Amoss will comment on the topic today and, if he does, we will bring it to you. Check back throughout the day.

We believe you will see Amoss key on the same 'weaknesses' that he outlined on August 12th. He will probably stress that he 'suspected that the dividend cut might come as soon as with this August earnings release', but it was not a guarentee. He will probably predict those problems will now be revealed in the Q4 earnings report.

We have our thoughts, but we are going to save them for the moment. Let's see what Amoss has to say first.

The Bank of Montreal is scheduled to report earnings today and everyone is watching keenly for the results.

Will BMO cut it's dividend now, in the next earnings report or not at all? Will this initiate a collapse in the stock price?

Bloomberg reported the Amoss speculation yesterday and quoted John Aiken, an analyst at Dundee Securities Corp. in Toronto, as saying that "the speculation may have contributed to Bank of Montreal’s decline. Aiken's believes the bank’s dividend is safe. Bank of Montreal spokesman Paul Deegan declined to comment."

Google Finance has cited the Bloomberg report on it's BMO stock quote page, so the speculation has now entered the mainstream media.

Management will release results before the bell Tuesday, and hold a conference call at 2pm eastern time. BMO is up 25% since reporting better-than-expected profit and announcing 1,100 job cuts on May 26. Overall options activity in BMO was more than 12 times average, with puts outnumbering calls by 20 to 1.

Monday, August 24, 2009

Here, in Dan Amoss's own words, are some of his thoughts on the Canadian banking system.

They were written by Amoss on August 12th, 2009.

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Everyone thinks they’re safe from the current financial crisis.

No one thinks they’re doomed.

I’m talking about the Canadians, of course.

See, lately, I’ve read a lot about the superiority of the Canadian banking system. And naturally, my contrarian instincts took over.

The Canadian banking system has won accolades for avoiding direct exposure to the most tempting forbidden fruit: products like subprime mortgages, credit cards, leveraged buyout loans, and loans to finance insane commercial real estate purchases.

The financial press loves Canadian banks. On May 19, The Wall Street Journal ran a piece suggesting that these banks are a model of sustainability, and now have the opportunity to acquire U.S. banks on the cheap:

“Not long ago, Canadian banks were considered slow footed, provincial, and too conservative to flourish in the global boom for financial institutions. Now that banks in the U.S. and Europe are reeling from loan losses and face growing government scrutiny and ownership, Canada’s six major banks are seen as a potential model for battered financial institutions. TD Bank, Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada posted more than C$3 billion (US$2.5 billion) in combined profit in the latest quarter.” [Ed. note: quarter ending April 30, 2009.]

Canada’s biggest six banks account for more than 85% of the assets in the country’s banking system. By and large, these banks made a smart decision to avoid securitization. Securitization refers to loans that banks originate, bundle together, and sell off to pension funds, money market funds, insurance companies, and other institutions.

But this doesn’t mean that Canadian banks have no credit risk. On the contrary, they have plenty. Mark to market accounting has not yet cut down Canadian bank earnings, because the Canadians have not yet accounted for the impending wave of mortgage, consumer loan, and corporate loan losses.

They will by the end of 2009. It’s impossible to avoid. And just to give a perspective on how quickly lending grew at the Canadian banks, the chart below shows that assets at the top six Canadian banks grew from C$1.3 trillion in October 1999 to C$2.7 trillion in October 2008. Equity at these top six banks grew in line with assets; all six kept their ratios of assets to common equity fairly constant since 1999.

Growth in assets, even if accompanied by growth in equity, is always a risky proposition for banks. At the time the loans are made, everything seems fine. Then, when a serious recession arrives, and a dramatic credit loss cycle begins, the market value of loan portfolios can rapidly decline by 5% or 10%, pushing the banking system to the edge of insolvency. Insolvency is when the value of assets is less than the value of liabilities. Bank regulators don’t like this scenario and pressure weaker banks to raise very expensive, dilutive equity capital in order to protect more senior lenders, including depositors, from suffering losses.

Canada has just entered what will ultimately be an enormous credit loss cycle, and by the time it’s over, the Canadian banks could easily lose their pristine reputations. Until the middle of 2008, Canada’s economy was booming. Its mining, energy, and manufacturing sectors are world-class, and every other sector was pulled along for the ride.

But the wheels fell off last fall. According to Statistics Canada, the unemployment rate rose to 8.4% in May — the highest in 11 years. Ontario, with its heavy manufacturing base and ties to the “Detroit Three” auto companies, is especially hard hit; Ontario lost 234,000 jobs, or 14% of its entire manufacturing work force, since last October. Ontario will lose even more jobs this summer as GM and Chrysler dramatically cut auto production. Alberta has slowed dramatically too. Just a year ago in Alberta, every skilled construction worker was working overtime on oil sands projects. Now many projects are postponed and workers are getting laid off. The unemployment rate in Alberta nearly doubled from May 2008 to May 2009, to 6.6%, and is heading higher.

For Canada, this credit cycle will probably be worse than the one in the late 1980s. According to RBC Capital Markets, annualized loan loss provisions for the entire Canadian banking system peaked at 2.88% of all loans in 1988. As of April 2009, this figure was just 0.77%. Over the next year or two, loan loss provisions should easily triple or quadruple, which would cut deeply into profits and capital…sending the worst of the Canadian bank stocks down.

So how do you play it?

I recommend you dig in to the major banks to figure out the one with the most exposure to unemployment rates.

Blogs are abuzz with news that Bank of Montreal is in financial trouble. Sparked by the claims made by Dan Amoss, rumours are running rampant.

This was posted on Stockgumshoe.com:

"On Monday, August 24th, at noon, Dan Amoss will expose the biggest banking lie of the past 64 years. Given the past 21 months of market action — that’s no small claim. If recent mainstream headlines make you believe that banks have weathered the storm. You better think again. Dan’s caught another major bank he thinks is lying about being able to pay their massive $1.5 billion dividend scheduled for 2009. He believes this bank’s using every shady accounting trick possible to hide losses from their shareholders."

These allegations have the internet in a tither about possible financial problems with the Bank of Montreal.

So what is Mr. Amoss going to announce today?

According Joe Schriefer, Publisher of Amoss's Strategic Short Report newsletter, Mr. Amoss will assert that shareholders are being mislead by BMO.

In a promotional piece to plug subscriptions for the newsletter, Schriefer states that Mr. Amoss will claim that BMO is in denial about the level of potential losses the bank faces. If jobless numbers continue to spike — as he believes they will — BMO will be on tenuous ground. Amoss will cite stats about:

personal debt levels in Canada hitting an all time high,

survey's showing 21% of all respondents admitting that they’re at a level where they can’t “manage their debt”, and

reports from David Wolf, a Merrill Lynch economist, saying he’s worried that Ontario has been running “a larger financial deficit” than the most heavily indebted economies.

Amoss will claim that Ontario accounts for over $85 billion of BMO's outstanding lonas (more than 60% of their entire loan book) and that since more than 1 in every 7 people have jobs tied to the auto industry in that Province, and since unemployment in this specific area just hit an all time high - with some reports coming in at 14% unemployment — that the potential default rate is far, far higher than the Bank of Montreal has budgeted for.

The next claim Amoss will make is that BMO is using accounting tricks to hide bad loans by grading their loan books 50% BETTER in this recession than they have in previous recessions.

Amoss will assert that if BMO is finally forced to admit to a massive wave of loan defaults — which he believes they’ll be forced to do as early as August 25th — they’ll have a huge hole in their balance sheet… and they’ll have no choice but to cut their dividend to survive.

Since no major bank like this one has cut their dividend in 64 years, Amoss believes if BMO is forced to cut, their share price will crash.

Finally, Schriefer says, Amoss will assert that BMO is lying about how much money they have.

Amoss will point to Lehman Brothers and their 3rd quarter conference call on September 10, 2008. Lehman Brothers touted to their shareholders that they were “well capitalized”. Five days later they filed for the largest bankruptcy in history.

Lehman's was able to make this false assertion, as Amoss says, because Lehman's used an accounting trick called the “Tier 1 Capital Ratio.”

Lehman's claimed that the higher the “Tier 1 Capital Ratio,” the more money they had. And the more bad loans they would be able to withstand.

Specifically, Lehman bragged about something called an “11% capital ratio” and told shareholders that this was among the strongest in the business.

Amoss will assert that he identified this diversionary tactic with Lehman's and called their collapse as a result.

Amoss will insist the “Tier 1 Capital Ratio” is NOT the way to measure the true value of a financial stock.

He will also point out that Citigroup did the same thing. In their third quarter 2008 conference call, Citigroup said, “our Tier 1 ratio was 8.2% and our liquidity position remains strong.”

Less than 45 days later, the taxpayers bailed out Citigroup with a $20 billion capital infusion.

Amoss will assert that BMO is now doing the same thing that Lehman's and Citigroup did by claiming a “10.4% capital ratio” as proof of their financial health.

Amoss will say that’s a lower capital ratio than Lehman was touting just five days before bankruptcy. Amoss will assert that BMO is in no better position to withstand losses than Bank of America, SunTrust or First Third, all of who had to cut their dividend to survive and all of whom have tanked over the last year.

Amoss's argument will be that the deadly combination of being in denial about the big picture, grading their loans better than they are, and lying about how much money they have should all culminate in one outcome... a dividend cut followed by a sudden drop in share price.

Amoss will claim that despite the accounting tricks, BMO's first quarter earnings barely covered half of the dividend they promised shareholders.

To keep up their front of a healthy company, Amoss will say BMO paid out dividends as normal, forcing them to burn through $167 million in cash they stocked away for a rainy day.

And even though the second quarter earnings fell short of the cash they needed to pay that dividend, Amoss will say BMO dipped into their reserves and paid that one, too... draining them of another $50 million.

Why would BMO continue to pay the dividend?

Schriefer says Amoss will assert it’s all an attempt to keep the BMO share price high for long enough so BMO can dump their own stock for major profits.

Amoss will assert that after years of buying their own stock, the tides have turned in the past three months and that BMO's sell transactions have outnumbered the buys. Amoss will also assert that BMO's Chief Financial Officer of the bank’s trading arm sold $760,000 of his stock since their last conference call.

And in a telling sign less than two months ago, Amoss will claim that a message left at stockhouse.com claims that insiders sold a whopping $2.8 million worth of their own stock in a single day.

Amoss believes the frantic insider selling since their last quarterly report suggests one thing: As soon as their next earnings call — scheduled for Tuesday the 25th of August— they could announce a dividend cut.

Sunday, August 23, 2009

.The rumour mill on the Bank of Montreal issue is reaching a fever pitch.

I am told that several local ATM's have had literal 'runs' on withdrawls due to fears of a possible 'bank holiday' during the week. One ATM I visited was 'closed for maintenance'.

Clearly some are concerned that it might be important to have cash on hand for Monday just in case.

As we have covered in the preceeding two posts, there is speculation on a number of US financial blogs that BMO will be unable to fulfill a fat dividend payment of $1.5 billion. The speculation is that, should this come to pass, it will trigger a massive selling of stock and a cascade of withdrawls from the bank.

This is significant because BMO basically has deposit liabilities of $397 billion and cash assets of $21 billion - not uncommon for a bank but deadly if confidence in the bank was questioned. Let's face it, BMO would have to shut it's doors if 8% of it's customers attempted to withdraw thier money.

Which is why people are paying signficant attention to the claims being made by Dan Amoss. This was posted on Stockgumshoe.com:

"On Monday, August 24th, at noon, Dan Amoss will expose the biggest banking lie of the past 64 years. Given the past 21 months of market action — that’s no small claim. If recent mainstream headlines make you believe that banks have weathered the storm. You better think again. Dan’s caught another major bank he thinks is lying about being able to pay their massive $1.5 billion dividend scheduled for 2009. He believes this bank’s using every shady accounting trick possible to hide losses from their shareholders."

Amoss has also been cited on Pennysleuth.com as saying:

"If you think Canada escaped the downward trend in U.S. banking, think again. While the country may not have plunged headfirst into subprime mortgages, it did dip heavily into risky derivatives. The leverage it took on generated impressive returns on equity in good times, but that same leverage is set to wipe out equity today.

Shareholders in one 'safe' Canadian bank will have to rethink their loyalty. Its looming solvency crisis practically guarantees a dividend cut. And that’s our catalyst for this month’s short play action – offering us a chance for 200% profit potential.

Accounting secrets have not yet obliterated Canadian bank earnings – like those of U.S. banks – because the Canadians have not yet accounted for the coming tsunami of mortgage, consumer loan, and corporate loan losses. Here’s how they loaded those loan books with hidden risk."

These warnings have triggered a virtual frenzy on the internet this weekend. It is possible that this 'buzz' could even trigger a sell-off of BMO stock in the US tomorrow morning?

Quick internet research confirms BMO is under stress. Quarterly results are down a massive $284 million from the same period a year earlier. The money it had to set aside for bad loans has jumped by over $220 million to $372 million.

And since that quarterly report, the situation has worsened.

However the reality is that BMO still earned a pre-tax return of half a billion in the last reporting period. It seems difficult to believe that BMO could actually crumble.

But the stock market is not rational. People are not rational.

And it will be interesting to see what develops overnight and tomorrow prior to Amoss's report at 12:00.

The OSC exempted the BMO Trust from continuous disclosure requirements.

The BMO Trust is a trust "which was established for the purpose of effecting offerings of trust securities in order to provide the bank with a cost-effective means of raising capital for Canadian bank regulatory purposes."

Not sure it it's an important tidbit in light of the rumours surrounding the Dan Amoss's announcement or not, but I am sure the average investor would be concerned anytime an organization is 'exempted' from making the regular disclosures legally required.

BMO has sought to revise two of its commercial-paper funds to avert a C$495 million writedown.

The writedowns had the potential to force BMO to withdraw support for a plan to restructure about C$33 billion in non-bank commercial paper that hadn't traded since August, 2008.

DBRS, the Canadian credit-ratings service, had downgraded notes of the Apex and Sitka trusts to junk just the day before. BMO provided about C$38.5 billion in these so-called 'backstop liquidity' credit lines for its own commercial paper funds and third-party trusts as of Oct. 31, according to its annual report.

Bloomberg, in it's article, cited that Bank of Montreal was the worst performing bank stock in Canada this year. In february the stock had fallen C$2.65, or 5.1%, the biggest decline since Oct. 29, 2001.

Saturday, August 22, 2009

A number of US-based finance blogs are abuzz with rumours about the Bank of Montreal.

Dan Amoss is the Managing Editor of Strategic Investment, a highly respected US newsletter. According to Amoss – who is famous for calling the crash of Lehman Bros, Bear Sterns and other giants before they failed – a major bank is lying about its ability to pay shareholder dividends, has been gaming its books, and is about to crash.

Amoss doesn’t say which bank he’s talking about, but gives the following hint:

"[It has] a 192 year old history and 37,000 employees..."

A quick Google search reveals that this can only be the Bank of Montreal, also known as BMO Financial Group.

Stock Gum Shoe – a website devoted to guessing at the companies hinted at in stock tips - confirms that Amoss was talking about Bank of Montreal.

US financial blogs are all agog about this bit of news because Canadian banks have widely been seen as the world’s safest and most stable banks. Indeed, the Bank of Montreal was listed as the 33rd safest bank in the world by Global Finance.

Amoss says this bank won’t be able to pay the promised $1.5 billion dividend scheduled later this year, which will precipitate a crash in BMO’s stock by December.

The following is from www.stockgumshoe.com:

“On Monday, August 24th, at noon, Dan Amoss will expose the biggest banking lie of the past 64 years. Given the past 21 months of market action — that’s no small claim. If recent mainstream headlines make you believe that banks have weathered the storm. You better think again. Dan’s caught another major bank he thinks is lying about being able to pay their massive $1.5 billion dividend scheduled for 2009. He believes this bank’s using every shady accounting trick possible to hide losses from their shareholders."

The newsletter that Amoss writes is called Strategic Short Report and it promises to release details about this soon-to-fail bank in it's August 24th issue.

As a teaser, Amoss has given the following clues to this bombshell:

We already know their annual dividend tallies up to about $1.5 billion.

“With a 192 year old history and 37,000 employees, its crash would drop like an A-bomb on unsuspecting shareholders...”

“A major rating agency just cut this bank’s outlook to negative."

“And, in a warning sign I’ve never seen before, this bank’s own employees are speaking up — questioning management about the fudging of numbers on their most recent earnings conference call.”

www.stockgumshoe.com also offered the following:“Here’s why Dan thinks this Bank will get slammed. It all boils down to a few very simple things. This bank made risky loans to people who, unfortunately, are losing their jobs quickly. Without jobs, these people won’t be able to pay the bank back. The bank management is using accounting tricks to hide these losses from their shareholders, while some of the same executives even appear to be quietly dumping their own shares at peak prices. But they can only ‘fake’ it for so long. If those loans finally default, it’ll set off a cascading effect of losses... lower earnings… and a draining of cash. With no cash, regulators could force this bank to cut their massive dividend. And this dividend cut would force their share price to plummet — maybe as much as 50-75% in a day — as folks race for the exits.”

Amoss believes BMO is essentially cooking the books with their loan losses and such, and that he seems to think that a collapse is imminent.

Right now it's all rumour and innuendo.

However there are several reports on the web that do indicate that a Bank of Montreal analyst was asking somewhat snippy questions on the last conference call about the expected losses and the accounting thereof.

I have no idea if that’s unusual or not, I’m not a habitue of bank conference calls, and I don’t know whether or not analysts who are employed by the bank giving the call typically kowtow to the CEO and CFO or ask tough questions.

BMO has been reporting profits every quarter — but of course, a bank has lots of ways of reporting profits even if they’re not genuinely profitable, as Dan implies, and we have certainly seen plenty of evidence that banks can go from profitable juggernaut to pile of rubble in a matter of weeks if their projections turn out to be overly optimistic. Whether or not Amoss is correct that this will be happening to BMO, I have no idea — analysts are still predicting that they’ll be recording profits for this year and next, and that the shares trade at a forward PE of about 10, which is a lot lower than the valuations of many of the big US banks … but then again, the big US banks fell a lot further, too, and have much more of a “snap back to profitability” investment thesis behind them.

The issue is drawing keen US interest because last Fall, when Citigroup and Bank of America were begging for bailouts, many investors started to think of all of the big Canadian banks as a sort of safe haven in the financial sector … after all, the shares collapsed “only” 50-60% in 2008, not the 95% that many US banks suffered through.

BMO, for one, is actually just about even with where the shares traded a year ago, which is something you can’t say about a lot of big American banks.

Amoss is expected to suggest that this safe haven allure has blinded investors to the fact that many of the Canadian banks have the same kind of asset-writedown problems coming as do the banks in the United States.

That’s just a guess, but let's face it... Canada’s economy is weak thanks to our close ties to the US. BMO and our other Canadian banks are global banks now, so they’re getting a taste of the global slowdown.

Amoss claims BMO is in trouble because of their exposure to the oil and automobile industries and to the communities impacted by unemployment in those industries, and because they have not been earning enough to cover the dividend (a dividend cut at BMO would, in Amoss’ opinion, cause the shares to crash).

Interestingly BMO's next quarterly report is due on August 25, the day after Dan Amoss is scheduled to release his report. Amoss also implies that the dividend cut might come as soon as with this August earnings release.

Right now it's all rumour.

But next week has the potential to put Canada on the world stage, front and centre.

It's bank failure friday and the full effects of the housing correction are starting to take hold in the United States.

As noted by the New York Times in this article, it is becoming clear that most of the bank failures this year have nothing to do with the strange financial products that seemed to dominate the news when the big banks were nearing collapse (Bear Sterns, Lehman Brothers, etc.).

The current wave of failures are from banks that are now losing money. They are going broke the old-fashioned way: They made loans that will never be repaid.

Those loans will never be repaid because they have been made for mortgages that were sound three years ago, but are now hopefully in excess of what the property is now worth.

More importantly they were made to homeowners who were, at the time, solid, employed borrowers.

As the defaults compound they are destroying many small US banks who did not get in over their heads with derivatives or hide their bad assets in off-balance sheet vehicles. Nor did their traders make bad bets; they generally had no traders. They did not make loans that they expected to sell quickly, so they had plenty of reason to care that the loans would be repaid.

But no matter. The loans are going bad, in some cases with stunning rapidity, in volumes that they never thought possible.

The sizeable drop in real estate values is triggering underwater mortgage conditions all over the United States. Homeowners are defaulting because of this condition and pulling their banks down with them.

This is exactly the condition that the Bank of Canada (and the real estate industry) have been desperate to stave off in Canada.

Jim Wigand, the F.D.I.C.’s deputy director of resolutions and receiverships, says banks that are failing now are in worse shape — in terms of the amount of losses relative to the size of the banks — than the ones that collapsed during the last big wave of failures, from the savings and loan crisis of the late 1980s/early 1990s.

The absence of problems in the middle of this decade was taken as proof that nothing very bad was likely to happen. Any bank that did not lower its lending standards from 2005 through mid-2007 would have stopped growing, simply because its competitors were offering more and more generous terms.

In Canada, the industry believes they have staved off disaster. So banks have returned to making loans with 0 down and 35% amortizations.

The New York Times article makes an interesting observation:

"Two years ago, when the subprime mortgage problems began to surface, Washington took great comfort from solid balance sheets, which regulators thought meant the banks could easily weather the problem."

"Last year, we learned that the regulators, like the bankers, did not comprehend the risks of some of the exotic instruments dreamed up by financial engineers. This year we are learning that the regulators, like the bankers, also failed to understand the risks of the generous loans that the banks were making in the middle of this decade."

Those in charge dramatically misread the situation.

If the economy does not restore itself quickly, and sales of US government debt push interest rates higher... then next year we will reading about the massive risks to our country posed by the huge number of loans made this year to first time buyers with little or nothing down and 35-year amortizations.

Sensing, as I do, that the US Federal Reserve should be moving now to remove it's stimulus money, Buffett let his thoughts be known by saying that the U.S. must address the massive amounts of “monetary medicine” that have been pumped into the financial system and now pose threats to the world’s largest economy and its currency.

The “gusher of federal money” has rescued the financial system and the U.S. economy is now on a slow path to recovery, Buffett wrote. While he applauds measures adopted by the Federal Reserve and officials from the Bush and Obama administrations, Buffett says the U.S. is fiscally in “uncharted territory.”

Indeed it is. But what does Buffett see as the danger to getting a handle on things?

Elected officials who won't make the difficult choices they need to, of course.

"Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes," said Buffett.

Too true.

But isn't that what everyone has been saying? That the stimulus money won't be withdrawn quickly enough because of the pain it will cause the economy?

Inflation is the easy way out. And politicians always take the easy way out.

Wednesday, August 19, 2009

Despite the fact 'official' statistics have inflation in negative territory, mainstream media is starting to pick up on what everyone can see and can't be denied... inflation is present.

In a Globe and Mail article, it is pointed out that even with the consumer price index (CPI) at a 56-year low, Canadians are feeling the pinch as food inflation persists.

And that's because food prices were one of those items removed from the CPI in the early 1990s.

Statistics Canada reported yesterday that food prices were 5.6% higher in grocery stores in July than they were a year ago, and 3.4% higher in restaurants, although the overall inflation rate fell by 0.9% year-over-year.

Pity the poor restaurant owner.

Restaurants' food costs jumped by 6.7% in the first seven months of 2009 and labour costs also rose, with the minimum wage increasing by an average of 6.9% across the country this year.

With labour and food accounting for 70% of the cost of doing business, restaurant operators are in a vise.

As much as restaurateurs would like to cut prices to attract what's left of the discretionary dining dollar, they are hard-pressed to do so.

“They're hanging in there, but their margins are getting thinner and thinner. Many restaurant operators are getting by on profit margins of 3%, 2%, even 1% in some jurisdictions,” said Garth Whyte, president of the Canadian Restaurant and Foodservices Association.

How can restaurant's raise prices and draw customers when all the public hears is that inflation is supposedly not there. "Prices are doing down, not up!", says the indignant consumer as he walks away.

Meanwhile bond investors are not duped by all the talk of negative inflation. In an article titled 'Bond Investors Gird for Inflation' we see that Canadian real return bonds have been outperforming conventional government bonds during the past month. Real return bonds could continue to outperform for several months, according to Merrill Lynch Canada Inc.

Real return bonds are domestic government bond issues that pay investors a rate of return that is adjusted for inflation as measured by the consumer price index, including food and energy. Unlike conventional bonds, this feature assures investors' purchasing power is maintained regardless of future rates of inflation.

Bond investors are already looking for protection from inflation. Perhaps they can see exactly what the Governor of the Bank of Canada saw when he warned two weeks ago that "the era of ultra-low interest rates are coming to an end and Canadians should prepare...".

Tuesday, August 18, 2009

Yesterday I commented that central bankers are loath to pull back on their support for the financial system before it's clear the economy has staged a stronger recovery.

More importantly, the US Federal Reserve has a long and painful history of ignoring asset price inflation.

The current stock market boom is clearly another asset bubble. None of the market fundamentals support the astonishing gains the market has made since March 9, 2009. Stimulus money has fueled this mini-boom.

Yet the Fed is not taking any action. Through it all we are told the Fed will remove the stimulus before the funds find their way into general circulation and fuel inflation. "Trust us", we are told.

Hmmm...

Look at this chart (click on image to enlarge):

The official rate of Consumer Price Index shows that inflation currently stands at -2.01%. Officially, inflation is non-existant and in negative territory.

No need to remove the stimulus... right?

Not so fast.

As faithful readers will recall, I posted this piece in July which outlined how the method for calculating inflation was changed by the government in the 1990s.

How would the chart above look if we calculated inflation using the same formula in place from 1872 to 1990? Would we still be looking at a negative (-2.01) rate?

Shadowstats.com has produced this graph which makes that comparision (click on image to enlarge):

Calculated using the same method as the that used in the late 1970s reveals that inflation is, in fact, proceeding at 5.44%.

Inflation is here. And the US Federal Reserve is ignoring it.

So how can you have faith they will withdraw the stimulus before it triggers a similar period of 22% plus mortgage rates?

The short answer... you can't.

Inflation is already here and the US Federal Reserve has failed to act.

Now we have a giant bomb on the verge of igniting. How long before it triggers a huge run-up in rates?

Monday, August 17, 2009

The transformation of Vancouver real estate prices from the stagnancy of the mid 1990s (when prices were flat or increased at historical normals) to a situation over the last 9 years where double digit increases became the norm was a result of the worldwide influx of cheap money.

After the dot-com collapse of 2000/2001, a dramatic wave of inducements entered the financial markets to resusitate the economy.

Led by the US Federal Reserve under Allan Greenspan, interest rates were dropped making money cheap to borrow at the highest levels of the finance world.

Thus began the greatest campaign in history to get you - the consumer - to borrow money.

Year after year property increased to the point where annual minimal 10% increases were not only anticipated... but expected. But the bubble has lead to a spectacular crash in most of the world, particularly the United States.

The US Federal Reserve has spent the past year cleaning up after the mess of that housing bubble crash, a mess it created.

But in attempting to cleen up, has the Fed been responsible for pumping up another bubble, this time in stocks?

To head off the worst downturn since the Great Depression, the US central bank has slashed interest rates while funneling money to banks.

Recently the Federal Reserve has won praise for its efforts. The pace of job losses has slowed (although losses still pile up), and there has been a modest recovery in output.

Stocks, however, defied that modest rebound, having bounced back with startling speed.

Since global markets hit their bottom in March, the S&P 500 has jumped 51% -- even as the outlook for economic recovery remains dim.

"This is the most speculative momentum-driven equity market since the early 1930s," Gluskin Sheff economist David Rosenberg wrote in a note to clients Monday.

The rally has occurred, in part, because investors perceive the worst-case scenario -- a 1930s-style Depression -- is off the table.

And while the gains have been remarkable, they come after an even bigger decline.

Keep in mind that despite the massive rally, the S&P is still down 16% since Lehman Brothers collapsed in September.

Has the bounce back been justified?

The underlying fundamentals of the economy appear week. If the foundation isn't there, the smart money still fears that this is a bear market rally.

Worse, the evidence suggests that the surge we currently have is nothing more than another Fed financed speculative mania that could end in another damaging rout.

Consider... recent weeks have brought huge rallies in some of the lowest-quality stocks -- including firms such as AIG (AIG, Fortune 500), Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500). These firms are being propped up by the government and are unlikely to return to health any time soon.

What's more, this year has brought an 80% surge in emerging market stocks, while the dollar has posted a 10% decline since March.

A declining dollar and surging emerging markets were the hallmarks of the credit-fueled bull run earlier this decade.

"We have put the band back together on a lot of this," said Howard Simons, a strategist at Bianco Research in Chicago. "That couldn't have happened without liquidity."

And there's the rub. Liquidity is a nebulous concept. You can't dispute the fact that that central bankers around the globe have poured huge amounts of money into the markets to ease the financial crisis.

And given free money, investors' appetite for risk shoots higher and they start to gobble up stocks.

But when the outlook for economic growth doesn't seem to support the higher stock values, what happens?

"Many observers are wondering whether the strong stock market rebound since mid-March is already a forerunner of the next recovery or simply driven by a reflux of liquidity into riskier asset markets," Deutsche Bank Research analyst Sebastian Becker wrote in a report last month.

And that's exactly why I feel that the stage is being set for another huge crash.

Fed officials have stressed that investors shouldn't worry... that they will start to unwind their financial support programs at the earliest sign of inflation.

Given the cost of cleaning up after the last real estate bubble, Becker writes that "this time, policymakers are unlikely to remain inactive should they suspect the formation of another asset price bubble."

But isn't that exactly what we are experiencing with this stunning stock market rally? Another asset price bubble?

Central bankers are loath to pull back on their support for the financial system before it's clear the economy has staged a stronger recovery. And the Fed has a long and painful history of ignoring asset price inflation.

"The central bankers have this textbook belief that the only inflation is the kind that appears in consumer price indexes," said Simons. "They don't believe what they're doing could cause an asset price bubble."

But I would suggest to you that is exactly what they have done. Ben Bernanke's efforts to prop up the financial system has created a new bubble.

Followers

History of Central Banks

“The Federal Reserve is now a government within a government. It is totally out of control. Congress doesn't control it. It's funded by the banks and we either have constitutional government or we don't."

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